Examples of reasonable equity split for sales mgr

I co-founded a BtoB technology startup about 2 years ago with one partner. In the first 1.5 years we

Quit our corporate jobs and worked (mostly) full time

Completed the majority of technical development (outsourcing some work)

Bootstrapped the company with about $20K each

Entered contractual engagement with a Fortune 1000 client; we received very positive feedback but unfortunately they did not purchase service due to a combination of other strategy priorities, recession, etc.

Several months ago my co-founder dropped out for financial reasons (we’re on good terms). Around the same time I found a colleague to serve as a sales manager part time (about 5-10 hours a week on avg) for fostering customer relationships; he also is working part time with another startup that he co-founded. The understanding was that he would work on commission for my company for the first few months as we both assessed each other. We're now discussing equity (yes, we should have had an agreement much earlier). He helped get the first (small) order (and has been paid commission). There is also evidence that we will see larger orders soon.

He has played an important role and I would like him to be the VP of Sales. He helped us generate revenue, he is self-motivated and we get along well. Having said that, his role is not indispensable in that he hasn’t re-written our company strategy, he doesn't have sales experience in our market domain and I've been engaged with selling to clients as much as he has.

Currently the equity split is 64% me, 18% my co-founder and 18% for an employee pool (the pool is unused). If we consider hours invested the approximate tallies are: him (sales mgr) - 120 hours, me - 4000 hours, and my original partner - 2500 hours. He has invested no cash (but has hinted that he would be open to that). My question: are there examples of reasonable equity distribution for cases similar to this one? I know this will be a conversation between me and him but I’d like to get a sense of a reasonable initial ballpark estimate. The equity will be contingent (according to some formula) of his increased participation (more hours/week…eventually full time participation).

2 Answers

At this stage of your company, you have a product, some revenue and now you need to expand. It sounds like you clearly need a sales guy.

It seems like you have a pool of options or share to give out, which is good. It's unclear if this is a C-corp or an LLC. For this discussion, I will assume it's a C-corp.

As for the equity split, you can consider this in a couple of ways:

Expansion Stage Company: Clearly the company was formed, built a product and is now starting to sell. The founding state is over. You and your partner took all the risk. Your "founders stock" has already been issued and now you will give out stock options to new hires. Since the VP of sales is a critical position, he should have a reasonable stake in the company. Now, this does depend on how many other people you will hire since your pool is limited to 18% (unless you issue more stock options). For a VP level guy, I would saw between 5-10%, over the duration. Again, this will depend on how many other people you hire since your pool is limited to 18%.

Restart: You now a single guy shop that has build something. You have a co-inventor /founder that has now left. You can recast the company and make all three of you founders in the new venture. If you do this, then the founders stock "vests" right away but you can also have stock options for keeping people around. The split would probably be about the same, maybe a little less for you and more for the new VP of sales.

One thing to consider is stepping back and figuring out your longer term plans are. This would include capital required and additional staff. That way, you can lay out your case as to the options you want to pursue.

You can also look at doing a founders agreement or something similar like mentioned in this question. A founders agreement would be a good idea if you decided to restart.

You don't know if that sales guy is indispensable. He got you your first sales, which means that he discovered your first customers and markets. And you have no other data points to suggest whether he is or isn't indispensable.

If you're going to give him equity, but he's not working full-time, then your interests of building a profitable business are not the same as his because you don't have a fallback strategy while he does, because of his day job. Misaligned interests are not a good thing to have for equity partners.

I personally believe that the job of a sales person is to bring in revenues and profits. Depending on what you value, he should be given a generous cut of the profits or a modest cut of the revenues. If he has done nothing for the business but bring in sales, he should get no equity. And I believe that he should be given trailing commissions to ensure that he also has a vested interest in keeping existing customers happy.

If he is going to have an equity stake, he should front a good chunk of cash at a good valuation. Perhaps the equivalent of 2 years salary. Then his interest is vested and well aligned with yours.

Make sure that your capitalization structure is acceptable to an outside investor. My knowledge is limited here, but I know that outside investors like certain kinds of structure and hate other kids.

Asides from that, get input from a wide variety of people, but make a decision that you are comfortable to own.